I have been getting questions from smart investors who think stocks are overvalued, but they are still looking for investing opportunities. Today I will answer questions regarding the French presidential election (Sunday, April 23) and the opportunities that it may provide.

To appreciate the opportunities, let us start by looking at a chart.

The chart

Please click here for the annotated chart going back seven years. It compares the S&P 500 ETF
SPY, +1.33%
with the iShares MSCI Eurozone
EZU, +1.39%
and Wisdom Tree Europe Hedged Equity ETF
HEDJ, +1.69%
The election in France will have the most impact on Europe, of course, but the U.S. is not immune.

Please note from the chart that European stocks have underperformed the S&P 500 by 118% and 90% on a currency-hedged basis.

For dollar-based investors, the currency plays a big part. The euro has fallen against the dollar in the period shown on the chart. The Arora Report has a long-term short position on the Euro ETF
FXE, -0.21%
from $134.37; FXE is trading at $103.96 as of this writing. The plan is to take more partial profits or hedge before the French election to reduce the risk.

There are two nightmare scenarios that may unfold. The ultimate nightmare is the National Front’s Marine Le Pen winning and, eventually, pulling France out of the European Union (and, thus, the currency bloc). The immediate nightmare would be a May 7 runoff between Le Pen and Jean-Luc Mélenchon of Unbowed France, or France Defiant. Le Pen is far-right, anti-immigrant and protectionist. Mélenchon is far-left, and wants fewer working hours and higher wages for the French.

The euro will likely rally. Financials in the eurozone may be special beneficiaries. The Arora Report portfolio has euro financial ETF
EUFN, +1.25%
and a bank stock
HSBC, +1.04%

Our portfolio also contains Nestle
NSRGY, +0.13%
which will be less affected due to its international character.

Any dip in emerging markets is likely to be a buying opportunity. Emerging market ETF is
EEM, +0.48%
Of special interest here are Turkey ETF
TUR, +2.32%
and Russian ETF
RSX, +0.84%

If one of the nightmare scenarios comes true

If one of the nightmare scenarios comes true, expect the opposite of the foregoing to happen. However, after an initial shock to the U. S. stock market, money will likely flow into U.S. stocks. Prime beneficiaries may be small cap ETF
IWM, +1.03%
and Nasdaq 100 ETF
QQQ, +0.99%
This will likely be a buying opportunity for those who think the market is too high to scale into new positions.

To guard against this scenario, The Arora Report portfolios are holding a fair amount of cash or are partially hedged.

Gold and silver

There continues to be a bid under gold and silver. If a nightmare scenario does not come true, the underlying bid may disappear, and gold and silver may crash. On the other hand, if a nightmare scenario does come true, expect gold to fly. ETFs of interest are gold ETF
GLD, -0.89%
silver ETF
SLV, -1.37%
gold miner ETF
GDX, -1.69%
and junior gold miner ETF
GDXJ, -3.11%
There may be very short-term trading opportunities using leveraged miner ETFs
DUST, +5.97%
and
NUGT, -5.62%

Monday’s gap

On Monday, stocks may open with a gap up or down. There is an opportunity here for aggressive investors to take certain positions ahead of the election. After the election, there will be additional opportunities for both conservative and aggressive investors.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.

Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

Nigam
Arora

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of the ZYX Change Method to profit from change by investing. The premise is that most money is made by predicting change before the crowd. Arora is the chief investment officer at The Arora Report and the editor of four newsletters that track the ZYX Change Method. Nigam can be reached at Nigam@TheAroraReport.com

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